Wednesday, March 09, 2016

Saizen's Defence - Results from my arbitrage attempt.

Chess and wargames have a lot in common in investing. Wargamers are familiar with ancient tactics such as Scipio's Defense. Opening chess moves are loosely classified into gambits and defences.

I attempted a nifty defense maneuver using the Saizen REITs in the face of poor market conditions a few months ago. For the technical details, you can refer to Bully the Bear's article on what he did for Saizen stock.

The strategy is to put money in a safe place with a guaranteed exit time and then exploit the market for more opportunities later. This is a good for folks with a cash reserve and want to fight off inflation.

The generalised strategy is as follows :

a) There has to be bearish market with great uncertainty over the next 6 months.
b) One stock is being taken private at a fixed date with a projected price.
c) The exit should be around 3-6 months away.
d) The gap between the current price and exit price will give you at least 5% profit.

If your cash hoard can be invested in this counter, you are in essence getting a fixed deposit yielding an annualized 10% yield with a 3-6 month tenure. Some popular finance books actually recommend leverage when you make bets like this and you can engineer a 20%-30% yielding position if you like playing with fire , but I do not recommend it because sometimes such purchase attempts fails and you can be hit with 10%-15% losses.

So I was able to put about $50,000 of family funds to lock-in this interest rate for my dad, most Saizen investors expect to have a major exit at the end of this month, with the remaining proceeds coming in before year end.

So far, I think results are mixed and we cannot conclude that it is a superior investment technique because the money has not been fully returned yet.

Just before CNY when things looked particularly bad, I created a tiny position of stocks and REITs which was centred around Mapletree Greater China Trust, I thought it was a good time because it was beaten down quite badly and my wife's portfolio can benefit from a portfolio which gave more than 8% and provided more diversification for her account.

Right now this other MCGGT portfolio is winning.

The problem with the Saizen defence is that in a bearish climate, Saizen itself never drops low enough to become a bargain while other stocks in the market became very cheap as the markets got worse.

After buying Saizen and locking down $50k, I was unable to exploit MCGGT later which was beaten down by bad news coming from China. MCGGT has already rebounded quite aggressively and I'm not sure if the returned proceeds from Saizen should be farmed into MCGGT,

But I'm quite there will be plenty of stocks being taken private this year. If you are precise with your calculations and can diversity across such opportunities, you can make a decent profit running an arbitrage desk from the comfort of your own home.



  1. Hi Chris, interesting topic about the abritage opportunities. BT reported that DBS research pointed out some possible candidates, but when I checked very briefly into them( only checking their margins, cash and debt situations), most have low or no margins, high debt..unlike the OSIM.. Just wondering out loud what will be your criteria for a possible candidate? My main look will be the cash ...

  2. Fundamentals matter less when an exit is declared, the only criteria is how much a person can make when the exit occurs and when. How much of your arbitrage portfolio to invest is based on the Kelly Criterion I talked about when I wrote about crowdfunding not too long ago.